STRENGTHS

WEAKNESSES

Heavy reliance on oil revenues (90% of exports, two thirds of tax receipts)

Insufficient energy production/distribution capacity

Ethnic and religious tensions

Insecurity and corruption putting pressure on the business climate

RISK ASSESSMENT

A weak recovery

After exiting recession in 2017, the tentative recovery should be confirmed in 2018, chiefly underpinned by the oil sector. This is because, affected by the sabotage of petroleum infrastructure and the collapse in the price per barrel in recent years, the sector is expected to continue the recovery begun in 2017. Firmer prices will sustain revenues provided production is spared any new disruptions. However, the sabotages by rebel groups in the Niger Delta have eroded private investor confidence. More generally, the climate of insecurity, political uncertainty, the complexity of the exchange rate system and ongoing high interest rates (14% since July 2016) will put pressure in private investment. Public investment’s contribution to growth will still be curtailed because with almost 60% of state revenues used for debt interest payments, implementation of the ambitious infrastructure programme under the Economic Recovery and Growth Plan (ERGP 2017-2020) will be constrained. Recovery in the construction sector will, therefore, be slow at best. Erratic electricity supply will continue to be an obstacle to growth in the manufacturing industries. The rains, expected later in 2018, could impact agricultural yields. As a result, household consumption, dependent on this sector of activity, already hit by high inflation, poverty and unemployment, will expand only moderately, which could, however, sustain services amid a favourable base effect.

Inflation, if it continues to fall, will remain high because of consistently high food prices.

Ongoing budgetary pressures

The draft 2018 budget provides for a 16% increase in spending on infrastructure investment. While stabilisation at production level is confirmed, the reduction in the fiscal deficit will be mainly down to oil revenues boosted by firmer oil prices. However, as in the 2017 budget, forecasts for non-oil revenues seem very ambitious, given the weak levels of economic activity. As in previous years, once implemented, projects could be slowed for lack of revenues. The sale of certain state assets could help resolve the financing concerns, especially as interest payments on domestic debt have increased rapidly. The government thus intends to make more use of external concessional loans to finance its deficit in 2018. The pressure on financing the deficit has led to a deterioration of the debt profile which nonetheless remains stable.

Still showing a surplus, the current account balance is expected to worsen slightly, despite increased receipts from oil exports. This is because demand for imports is set to grow more rapidly as growth recovers, however sluggishly. Transport is likely to continue to put a strain on the balance of services deficit, while profit repatriation by foreign companies will widen the income balance deficit. Remittances from expatriate workers will make a positive contribution.

The introduction of a currency window for investors and exporters in April 2017 has helped stimulate capital flows and take the pressure off the foreign exchange reserves. Nonetheless, these could start to diminish again as there is still a significant gap between the official rate of the naira and that of the parallel market. A devaluation of the naira in 2018 is still a possibility. This decision could increase the vulnerability of a banking system weakened by the deteriorating quality of its assets.

Growing political and security tensions

The political capital enjoyed by Muhammadu Buhari and his party, the All Progressives Congress (APC), in power since the 2015 elections is gradually being eroded. This is because while the economic environment remains difficult, the slow pace of reforms is resented by a population exasperated by imperceptible progress on living standards. Specifically, in 2017 the reforms were delayed by President Buhari’s six-month medical leave. The president’s ability to govern is a source of growing concern at a time when the country is dealing with renewed ethnic and separatist tensions. 50 years after the unilateral declaration of Biafra’s independence, which sparked a violent civil war (1967-1970), separatist tensions have resurfaced in the southeast of the country. Moreover, militants in the Niger Delta, responsible for the attacks on oil infrastructure since 2016 in their search for a greater share of the country’s resources, declared an end to the ceasefire in November 2017. They are again threatening oil production as well as political stability and security. Activity by the Islamist Boko Haram movement is still a major threat as evidenced by the numerous attacks carried out in the northeast of the country in 2017.

This political and security environment is affecting perception of the business climate, despite the efforts made following the setting up of a Presidential Council in July 2016 to improve the business climate. The country has, in particular, jumped 24 places in the Doing Business 2018 rankings (145th out of 190) thanks to progress on getting credit and starting a business.